Comparing Dynamic Equilibrium Economies to Data: A Bayesian Approach

This paper studies the properties of the Bayesian approach to estimation and comparison of dynamic equilibrium economies. Both tasks can be performed even if the models are nonnested, misspecified, and nonlinear. First, we show that Bayesian methods have a classical interpretation: asymptotically, the parameter point estimates converge to their pseudotrue values, and the best model under the Kullback-Leibler will have the highest posterior probability. Second, we illustrate the strong small sample behavior of the approach using a well-known application: the U.S. cattle cycle. Bayesian estimates outperform Maximum Likelihood results, and the proposed model is easily compared with a set of BVARs.

JEL classification: C11, C15, C51, C52

Key words: Bayesian inference, asymptotics, cattle cycle

The authors thank A. Atkeson, J. Geweke, W. McCausland, E. McGrattan, L. Ohanian, T. Sargent, C. Sims, H. Uhlig, and participants at several seminars for useful comments. The views expressed here are the authors? and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors? responsibility.